Aggressive Fed stimulus still needed: Yellen

Yellen, seen as a potential successor to Fed chairman Ben Bernanke, has reiterated Fed officials' intention to keep their foot on the accelerator as the US economy recovers.
Photo: Reuters

by
Joshua Zumbrun | Jeff Kearns

Federal Reserve vice-chairman Janet Yellen has urged the US central bank to press on with $US85 billion in monthly bond buying while tracking possible costs and risks from the unprecedented program.

“Turning to the potential costs of the Federal Reserve’s asset purchases, there are some that definitely need to be monitored over time," Ms Yellen said in a speech. “At this stage, I do not see any that would cause me to advocate a curtailment of our purchase program."

“I view the balance of risks as still calling for a highly accommodative monetary policy to support a stronger recovery and more rapid growth in employment," she said to the National Association for Business Economics annual policy conference, extending a debate on the Federal Open Market Committee about when to taper the bond buying to avert excessive risk taking.

But former Federal Reserve chairman Paul Volcker warned that Fed ­officials might find it difficult to rein in their historic stimulus at the appropriate time because “there is a lot of liquor out there now".

“At some point when the worm turns and the party is getting under way, to use that old analogy, at what point do you begin retreating?" Mr Volcker said at the same forum.

“You can make a mistake and go too quick, but the much more frequent mistake, in my judgment, is you go too slow, because it’s never popular to take the so-called punch bowl away or to weaken the liquor.

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Fed governor Jeremy Stein said last month that some credit markets, including leveraged loans and junk bonds, show signs of overheating.

Kansas City Fed president Esther George has warned that prices of some farm land have hit “historically high levels".

Ms Yellen said: “At this stage, there are some signs that investors are reaching for yield, but I do not now see pervasive evidence of trends such as rapid credit growth, a marked build-up in leverage or significant asset bubbles that would clearly threaten financial stability."

She also said that ending the Fed’s bond buying too soon could dampen the outlook for growth.

“Ending asset purchases before observing a substantial improvement in the labour market might also create expectations that the amount of accommodation provided would not be sufficient to sustain the improvement in the economy," she said. “Moreover, a weakening of the economic environment could also create significant financial stability risks."

Ms Yellen dismissed concerns that the program could complicate Fed efforts to eventually raise interest rates. She also said there was “no evidence that the Federal Reserve’s purchases have impaired the functioning of financial markets".

“So long as we pursue our purchases sensibly, I do not expect market functioning to become a problem in the future," she said.

Ms Yellen said the Fed’s $US85 billion in monthly asset purchases were adding stimulus to the economy.

“As long as we engage in them, it’s as though we are putting more and more and more accommodation into the system," she said. “The level of accommodation is increasing as long as those purchases continue.

“The FOMC has made very clear, but let me try to emphasise again, my own view that once accommodation has peaked", policymakers intend “to leave that accommodation in place until well into the recovery".

Ms Yellen has led a committee to shed light on Fed decision-making.

The central bank took steps in January last year towards greater openness by publishing a mission statement, an inflation target and anonymous forecasts by each FOMC participant for the benchmark interest rate.